Kilduff: Those Rumors Behind the Rally in Oil

Want to move the oil market these days? Fire off a headline about Iran, and, with the help of instant messaging, tweeting, blogging, and some old fashioning phone calling, you get a significant rally.

Seriously, the oil market is incredibly nervous about the possibility of martial conflict with Iran. So much so, six of the past seven Friday sessions have produced price rallies, nearing as much as $2.00 per barrel, as traders fear being short or even flat ahead of possible weekend developments, while the markets are closed. (Track Oil Prices Here)

Just, today, news that a private logistics company noted that Iranian oil exportsappear to have fallen 300,000 barrels per day in March, sent prices spiking. This is not a material amount of oil, and curtailment of oil purchases by most of Iran’s buyers has been well-known to the market, due to the increased sanctions.

Last Friday, the oil market was alarmed by the cut-off of Iran from a major international bank settlement system, known as SWIFT.

It is clear that the pressure is mounting on Iran. And Iran it is signaling is readying for a long slog, as they have appear to be stockpiling wheat, while they are still able to make payments for it.

A counterpoint to these concerns, however, came from Saudi Arabia, earlier this week, as well as other good news from other oil producing countries. Saudi Arabia provided tremendous transparency by announcing their current production level: 10 million barrels per day; their spare capacity: 2.5 million barrels per day; and their holding of large amounts of crude oil in storage in the Kingdom and in Asia. Iraq is producing the most oil since 1979, and announced that it will be able to fill any gap left by an Iran outage. Finally, Libya’s oil production is back to pre-war levels, and is readying their large Ras Lanuf refinery for imminent restart.

The return of this major refinery should do a lot to relieve refined product tightness in the European market, which has been impacted by the insolvency, among other things, of its largest independent refining company, Petroplus.

So, why is the oil market so reactive to the Iran headlines, no matter how specious?

The main reason, of course, is the stakes involved and not so much as how they relate to Iran’s oil production and exports. It is the Strait of Hormuz that makes this situation so incendiary.

It is fully expected by market participants that in the event of conflict, the Iranians will, ultimately, take action to block or merely degrade the navigability of the Strait of Hormuz.

And whose oil exports would be affected by such an action? That would be Saudi Arabia, Iraq, Kuwait, and the U.A.E. These are the very countries that claim to be able to fill the Iran production gap. It is likely that shortages would materialize, if exports from these countries were halted.

Still, as best we can tell, it is the considered opinion of intelligence analysts that Iran has not decided to proceed with manufacturing a nuclear bomb, as incredible as that sounds given the sanctions pain that Iranians are set to endure. That conclusion, however, should work to forestall military action.

The real development to watch will be the upcoming round of negotiations with International Atomic Energy Agency. If the talks breakdown, there will be considerable pressure to act. Also, as the European Union embargo draws closer on July 1st, the tensions will continue to rise, and it appears that even China is scaling back its purchases of Iranian oil.

As for these freaky Fridays, where rallies are incited by rumors ranging from Israeli troops massing on the Iranian border (they do not share a border) to Iran cutting off its oil output immediately, they highlight legitimate concerns and speculation, but are misplaced due to a lack of veracity. The situation has a long way to play out, and you will see it coming.

John P. Kilduff is Partner at Again Capital LLC Ltd. He's also a CNBC contributor.